Rent Guarantee Insurance: Everything You Need To Know

Author Charlie Cutler Read bio
Tags: rent insurance rental market
Date: December 23, 2021

When people are talking about getting into the real estate game, many of them look specifically at rental properties. There’s nothing like a little extra cash flow each month to improve your standard of living, right?

But how do you evaluate a potential rental property, and how do you look for renters insurance?

Rent guarantee insurance protects landlords against loss of income if a tenant falls behind or defaults on rent payments.

Landlords typically pay for the premiums, though it is also possible to require the tenant to pay for it instead in extra rent or if the lease specifies it in writing.

Insurers will look to the financial stability and creditworthiness of the tenant(s) to underwrite the policy. Let’s take a closer look, and make sure we are on track.

How to Evaluate a Potential Rental Property

In order to evaluate a potential property, you’ll need to look at factors in the surrounding neighbourhood, such as crime, streets, schools, commercial areas, railroad tracks, boarded-up homes, and of course, calculate profit potential.

Many of those would-be renters will either flat-out walkaway or only stay for a massive decrease in price. One rule of thumb to ask yourself when figuring whether to move forward with a rental property:

Would you want to live there?

Imagine yourself just out of college… Or maybe having young kids… Would you have moved your family to that house to rent?

San francisco at night

What Is Rent Guarantee Insurance?

Rent guarantee insurance is a risk-management product that protects landlords against loss if a lessee insolvencies. This insurance pays the monthly rent for a set period of time if the covered tenant stops making payments.

The rent guarantee insurance is specifically designed to protect a landlord’s income in the event that their tenant defaults on payments

A tenant who cannot pay rent (or refuses it) is a landlord’s worst nightmare. In most cases, individuals or/and companies who lease property have several policies to choose from, including the option to insure buildings and their contents as well as the legal expenses of getting a tenant evicted. 

Tenants remain liable for the rent owed and any legal fees

Some of these policies might refer to something called “rental cover.” However, that does not mean that they will be reimbursed if the tenant falls into arrears.

The guarantor can start legal proceedings against a delinquent tenant, including eviction and reporting to credit agencies.

Some landlords might opt not to fork out additional money on rent guarantee insurance, confident that the screens and credit checks they ran on tenants before leasing them their property and handing over the keys prove that they are financially capable of making monthly rental payments. 

Circumstances can change, however.

For example, an economic recession could result in the tenant losing their job and income. They may also move to another state and opt to relocate immediately without respecting the tenancy agreement.

When a landlord relies on rental income, whether to pay the mortgage or fund any other expenses, a tenant’s failure to pay can have serious implications

Street in San Francicso

Rent Guarantee Insurance Vs. Guaranteed Rent Schemes

When it comes to renting out your property, protecting yourself from financial loss is a top priority.

While both rent guarantee insurance and guaranteed rent schemes offer landlords financial protection against missed rent payments, there is a fundamental difference between the two.

Guaranteed rent schemes involve signing over the management of your property to a third party in exchange for a pre-agreed payment, even in cases of non-payment or empty property. On the other hand, rent guarantee insurance is a standalone policy that provides financial protection in the event of missed rent payments.

It’s important for landlords to understand the differences between the two options and choose the one that best meets their needs.

Limitations of Rent Guarantee Insurance

Insurers do not hand out rent guarantee insurance without doing their due diligence. Especially if a tenant has a history of being late with payments, an application to protect their rental payments will most likely be rejected.

Moreover, in order to qualify for such a policy, a tenant needs to have a (steady) job to pay the rent on the property they wish to lease

Failing that, insurers will demand that there is a guarantor in place with sufficient financial means to cover any shortfalls.

Another thing worth pointing out is that insurance payments generally kick in after one month of non-payment.  It could also be argued that the tenant’s security deposit should be sufficient to cover this month of no income.

Finally, rent guarantee insurance can be costly, equating from 5 to 7% of the annual rent payments. When possible, landlords will seek to get tenants to pay for this, although adding this extra cost might price them out of the market.